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Exult’s CEO, Now Turning a Profit, Transitions to the Next Stage

May 2, 2003
Related Topics: Outsourcing
CEO Jim Madden is in an enviable position. He’s the founder offour-year-old Exult, a late ’90s start-up that not only has survived one ofthe worst markets for new companies in a generation, but is even thriving. Infact, Madden’s biggest problem may be Exult’s exponential growth. Even thecurrent economic downturn has, in some ways, bolstered business for him.

On April 24, Exult announced its first-quarter income of $3.9 million; a yearago the company posted a loss of $6.6 million. Revenue increased 20 percent to$114 million over what it was at this time last year. The company has alsosigned $585 million in new business thus far, including a 10-year contract withthe Bank of Montreal in April.

Whether Exult’s success comes from Madden’s business smarts or sheerluck, his Irvine, California-based company has been a leader in the humanresources outsourcing industry from the get-go. And Madden believes that even ifthe country slides into a recession, Exult will grow about 15 percent this year.

The downturn has had a mixed effect on his company, but hardly anything tocomplain about. Exult is having trouble selling its discretionary services--liketraining and temporary staffing--on top of its HR outsourcing, because clientsin a slow-growing economy are less likely to spend on extras. But the downturnhas also been positive, because large companies are looking to cut costs, andoutsourcing can remove from 20 to 25 percent of HR spending.

Wild stock ride
    In the last quarter of 2002, Exult became profitable for the first time. Forstart-ups, four years to profitability isn’t unusual, says Marc Pramuk, asenior analyst at IDC. That achievement, Pramuk says, represents an importanttransition for Exult. The company was focused on signing new clients, but it’snow balancing that with the desire to maintain the black ink. That challenge iscomplicated by Exult’s business model, which involves high transition costsevery time a new client is signed up.

Managing those pressures may have been what caused Exult’s stock tofluctuate widely in the last six months. Although it has been trading at between$6.00 and $7.50 per share for most of April, in November 2002 it hit a low, atone point trading for $1.97 per share. Pramuk believes that was due to aslowdown in signing new clients as Exult worked to gain profitability. ButMadden says he’s always been choosy about clients, never adding as many as hecould.

In a four-month period between late 2001 and early 2002, Madden says, Exultsigned $2 billion in contracts. "We needed to give ourselves some breathingroom," he says, "so in the first half of 2002, we were very selective anddeliberate about signing clients."

Baird, an equity-research firm, seems positive about Madden’s work. In anApril 25 report, it writes: "We continue to be impressed by Exult’sprogress. The company has made enormous strides in structuring and executing oncontracts, and appears to have found the right balance between growth andprofitability."

Controversy over outsourcing
    Because the company didn’t announce its profitability until the end ofJanuary, Madden says, investors were skeptical. Now that Exult has announcedanother quarter of profitability, he expects that investor confidence will bebuoyed. His biggest challenge, he says, and the challenge for most CEOs now, isuncertainty. "I think as business gets a better handle on predicting thefuture, the economy will improve," Madden says. "If that happened, we couldgrow substantially more than 15 percent."

Not everyone is as optimistic. Exult’s typically intense pace of signing upnew clients may wind up being a double-edged sword for the company. A year agoanalysts were worrying publicly that Exult’s success would be its biggestchallenge--to hold down growth so that the company wouldn’t get overwhelmedby transition costs and held up in delivering a variety of complex services totoo many clients. Also, Exult’s contracts are so big that its three largestclients account for about 86 percent of the company’s revenue, according toBaird’s report. If one contract falls apart, Exult will suffer.

And some experts raise doubts about the viability of HR outsourcing ingeneral. John Sullivan, a professor of management at San Francisco StateUniversity, believes companies like Exult, Accenture, Convergys, and Aon havereached their peak. He sees them evolving into ASPs (application serviceproviders), furnishing the technology platform that businesses use to handleworkforce management. Sullivan says this will come about because outsourcing theadministration of workforce management--or the "guts," as Jim Madden callsit--causes HR to lose contact with employees. And that loss of ongoing contactleads to the loss of a competitive edge.

"You can have someone else raise your kids, but they wouldn’t really knowyou, your culture, your values," Sullivan says. "And if the same personraised all the kids in the neighborhood, they wouldn’t be very different fromone another," he says, referring to the tasks that outsourcing companieshandle for multiple clients. At Exult, about 80 percent of what they do isstandardized; 20 percent is customized.

"Even if technology replaces the need for people to handle administration,"Sullivan says, "the staffers in HR are still the ones dealing with employeequestions and concerns. If someone at a call center run by Exult is answeringthose questions, people in HR aren’t learning anything about their company’semployees."

BP America, Exult’s first client, says outsourcing has given it moreinformation about employees--not less--because Exult pulled together BP’sdecentralized HR systems. "It’s absolutely the right direction for us,"says Tom Macartney, HR operations manager for the western hemisphere. "Everytwo weeks we get reports and graphs of payroll processes, satisfaction rates,all our HR activity." After BP’s management gets information from its callcenter about employees’ interests and needs, it improves company policiesaccording to that information.

Jim Madden believes that the workforce-management outsourcing industry as awhole--and Exult within it--will only grow. Recent research by IDC backs himup. IDC found that despite a weak economy in 2002, HR business-processoutsourcing services saw strong growth throughout the year. Analyst Marc Pramuksays business-process outsourcing services are the fastest-growing segment ofU.S. spending on HR services, and increased almost 47 percent over 2001 levels,to $6 billion, in 2002. His firm projects that this spending will nearly tripleby 2007, growing 20.8 percent in the United States, to $15.3 billion.

Armed with that kind of research and his company's history of explosivegrowth, Exult’s Madden seems fairly sure of the future. He’s looking to add$800 million in new contracts this year.

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